The story of goldsmith lala on the process of deposit and loan creation by commercial banks
Answers
Once there was a goldsmith named lala in a village. In that village people used gold to buy goods & services. Gold & other precious metal's were acting as money. For security people started keeping the gold with lala. In return lala issued paper slip to people hand charged a small fee from them. Gradually, the paper slip or receipts began to circulate as money. For purchasing wheat or shoes or any other necessaries, people giving the paper receipts instead of gold hence, the paper receipts started acting as medium of exchange and everyone accepted this in the village.
Now,assume that lala had hundred Kgs of gold, deposited by people & he had issued receipts for hundred Kgs gold. By this time ramu comes to lala & ask some loans of 25 kgs of gold, then lala could decide that everyone will not come to withdraw there gold deposits at a time & he give the 25 kgs of gold to ramu. Later ramu pays this 25 kgs of gold Ali as repayment of loan. Ali could keep the 25 kgs of gold with lala in return for a paper receipt. Now paper receipts acting as money would rise on 125 kgs of gold. It seems that lala as created a money in air. In the same manner the modern banking system works in the way lal behaves in the example